econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 09 April 2016

Gold: Still The Best Insurance

by James Rickards

Gold bullion's dollar price soared 20% from mid-December 2015 to mid-March of this year on the London bullion market at a time when the dollar was widely perceived to be "strong." And it was indeed strong against other currencies. Normally, if the dollar is strong gold would go down, not up.

So what was going on?

Anyone puzzled by such riddles should read James Rickards' "The New Case for Gold." One of its points: Gold, now as always, is money, a more stable form of money than fiat currencies. He suggests that, in some not-too-distant future, the dollar's value could weaken to such an extent that an ounce of gold could cost $10,000, compared with $1,250 today.

To hedge against the possibility of such a dollar plunge, he recommends that investors hold physical gold as 10% of their portfolios.

Mr. Rickards is a portfolio manager at West Shore Group in Haddonfield, N.J., and the author of two other popular books, "Currency Wars" (2011) and "The Death of Money" (2014). He has advised the Pentagon on international economics and appears on television from time to time. He can claim to be a relatively independent observer even as his forecasts make gold bugs slaver.

Like other gold proponents, he notes that gold is unique among all the natural elements. It doesn't rust, corrode, or turn to gas or liquid at certain temperatures. It is not radioactive. It has few industrial uses other than jewelry. It is virtually indestructible. Although governments seldom talk about gold as money, they still treat it as such. They count it as part of their monetary reserves and go to great expense to store it in safe places like Fort Knox. The super-secure vault under the New York Federal Reserve Bank in Manhattan is compartmentalized to hold gold owned by other governments. When they sell some, the Fed credits their account and moves the gold into the buyer's compartment.

At one point during the Fed's quantitative-easing experiments in 2013, Mr. Rickards calculated that if the central bank's huge hoard of Treasury notes were marked down to the lower prices then prevailing in the bond market, the losses would exceed the capital paid into the Fed by member banks.

The Fed, he argued, would be technically insolvent. Unlike private banks, the Fed is not required to mark to market, so this was only a theoretical exercise. It turned out to be wrong, but as Mr. Rickards wryly notes, his error ended up making his point about gold, especially when a Fed official offered a critique of Rickards' reasoning.

The Fed official pointed out that when Franklin Roosevelt called in the nation's monetary gold in 1934, the Treasury gave the Fed, in return for the bullion, gold certificates last marked to market at slightly more than $42 an ounce. If you marked those certificates to the 2013 market price of around $1,200, their value would exceed $315 billion, far more than enough to keep the Fed fully capitalized.


What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)


From this riposte Mr. Rickards infers that, in a dollar crisis, the Fed itself still believes that the dollar is backed up by Treasury gold.

He asserts:

"Another name for an implied obligation to support the Fed with gold is a gold standard."

Even so, Fed officials past and present often disparage gold. Mr. Rickards asks:

"If gold is so worthless, why does the United States have more than 8,000 tons? Why do Germany and the IMF keep approximately 3,000 tons each? Why is China acquiring thousands of tons through stealth and Russia acquiring over 100 tons a year?... Gold is the foundation, the real underpinning, of the international monetary system."

His assertion may come as a shock to economists who thought the dollar-gold exchange standard was ended by Richard Nixon in August 1971.

China publicly reports ownership of only 1,658 tons of gold. But Mr. Rickards scoured purchase and shipping records and estimates that the real amount is much higher, perhaps more than 4,000 tons. That's a large share of the 35,000 tons officially held by all central banks. Why?

Mr. Rickards believes that China wants a hedge against a price drop in its huge holdings of U.S. Treasurys. If the world monetary system threatens to collapse and has to be reformed, China will thus "have a prime seat at the table."

How likely is such a collapse?

Dangerously so, Mr. Rickards thinks. He is highly critical of the Fed's experiments with zero-bound interest rates and quantitative easing. The Fed, he says, is trying to maintain "equilibrium" in the sense that a pilot maintains an airplane's equilibrium by manipulating the engine thrust, ailerons and tailfins. Crises keep happening because the

"Fed is sitting there in the cockpit trying to fly the airplane, but it's not an airplane - it's something far more complex."

The great economic philosopher Friedrich Hayek, among others, has explained how trying to "manage" complex systems, rather than allowing markets to work, invariably brings woe. The "stimulative" low-interest rate policies of central banks have caused global debt to soar by some $57 trillion over seven years to a point where it is now three times global production.

Excess debt exerts strong deflationary pressures, and major central banks are now fighting those pressures with such measures as negative interest rates. Mr. Rickards likens such moves to a tug of war between inflation and deflation. If inflation wins, as the Fed wishes it to, the dollar may cheapen dramatically. And its role as the world's dominant reserve and trading currency will weaken.

Gold is good insurance, whichever way things go, writes Mr. Rickards. Inflation will send the gold price up, if not to $10,000 then to a level that reflects gold's historical role as a stable measure of value. If deflation wins, the dollar price of gold will go down, but its constant real value means that other asset prices will likely fall more. "The New Case for Gold" reminds us that wayward policies bring about a search for money that is good as gold.

What better than gold itself?

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Metals Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Precious Metals


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
The Theory of the Monetary Circuit: A Critique
Consumers Carry Weak GDP Number Out of the Red
News Blog
Facebook Apps Most Popular, Google Has Strongest Overall Presence
The Months Of The Year With The Most Births
Blackberry Quits Smartphone Production
New Water Plumes From Jupiter's Moon Europa Raise Hopes Of Detecting Microbial Life
The Top U.S. Metro Areas For Startup Growth
What We Read Today 30 September 2016
NASA Slow Motion Rocket Engine Test
23 September 2016: ECRI's WLI Growth Index Unchanged
Final September 2016 Michigan Consumer Sentiment Up Slightly
September 2016 Chicago Purchasing Managers Barometer Strengthens
August 2016 Personal Consumption and Income Year-over-Year Growth Slows.
Rail Week Ending 24 September 2016: Data Is Mixed
Infographic Of The Day: Global Energy Efficiency
Investing Blog
Investing.com Weekly Wrap-Up 30 September 2016
Are You A Trader Or Investor?
Opinion Blog
Monetary Theory Gets Taken To School
First: 'Over-Population End-of Times' Now: 'Shrinking Population Disaster'
Precious Metals Blog
Where Silver Prices Are Headed Now After Fed's Latest Inaction
Live Markets
30Sep2016 Market Close: Markets Teetering On Investor Doubt, Will Collapse Of Deutsche Bank Matter, US Dollar Headed South Along With Gold, Higher Crude Prices Sure To Take Market Down
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved